Women in most parts of the world are not having enough children to replace our population. This is one of the great issues of our time, but is hardly ever discussed.

Yet the issue is very topical, with Chinese births falling to a 60-year low last year. Only 15.23 million babies were born, the lowest level since 1961 when the population was 654 million, less than half today’s 1.4bn. Soon, deaths will start to overtake births – as they have already in Japan.

It used to be thought that China was a special case due to its “one child policy”, pictured above. But this law was relaxed in 2015. And although births did rise in 2016, as some couples took advantage of the new law, forecasts that births could reach 23m in 2018 have proved completely wrong.

FERTILITY RATES HAVE COLLAPSED AROUND THE WORLD

China is not alone, however, in seeing its fertility rates collapse, as the chart of the world’s 10 largest economies confirms. It shows the number of babies/woman being born since 1950, based on UN Population Division data:

Asia.China’s rate has fallen from 6 to 1.6; India from 5.9 to 2.2; Japan from 3 to 1.5

Americas. Brazil has fallen from 6.1 to 1.7; Canada from 3.6 to 1.6; USA from 3.3 to 1.9

Europe. The UK has fallen from 2.2 to 1.9; Italy from 2.4 to 1.5; France from 2.8 to 2; Germany from 2.1 to 1.5

So only India is now above the replacement level of 2.1 babies/woman. And probably this will change within the next 5 – 10 years as latest national data shows that 12 states are already below replacement levels, whilst urban areas are at just 1.8 babies/woman.

Of course, part of the reason is increasing life expectancy – women don’t need to have a baby every year to ensure someone is there to look after them when they grow old.

But another key – and related – issue is the collapse in fertility rates itself.

POLICIES HAVE TO CHANGE IF FERTILITY RATES ARE TO RECOVER

It is easy to forget today that it is only within the last 100 years that men began to accept that women could play a full role in society. It was exactly a century ago, for example, that resistance to the idea of women voting began to crumble.

The catalyst for change was World War 1. With men having gone to fight, women had to be allowed to leave the home and go to work. And when the men came back, they felt unable to stop the move to allow women to vote. But this didn’t stop men enforcing marriage bars until the 1960s.

These meant that Western women would routinely lose their job when they got married, on the grounds that “it was the man’s job to earn the income, whilst the woman stayed at home with the children“. And, of course, women’s lives and ambitions were still restricted in a vast number of ways.

THE COST OF HAVING CHILDREN IS TOO HIGH FOR MANY WOMEN

Today, the collapse of fertility rates should be seen as a critical issue for society. Of course, not every woman wants to have children. But for those that do, there are at least 2 types of cost that currently discourage them.

One “cost” is simply the high cost of living. In China, for example, Caixin notes that

“High parenting costs are severely inhibiting. For example, in a typical Chinese middle-class family, the average annual cost of raising a child is about 30,000 yuan ($4,400).”

This is higher than China’s average per capita disposable income at just $4165 in 2018, according to government data.

But there is another “cost” that women have to face if they want to have children. This is that job conditions are still based on the pre-1960 pattern. As a recent survey by the UK parenting site, Mumsnet, reports:

“Three-quarters of parents found flexible working — including part-time hours, job shares and reduced hours during school holidays — more important to them than perks such as health insurance and gym membership, and more than half of them valued it over getting a pay rise.”

Tech companies seem particularly bad in this area, as one mother wrote recently about working at Facebook:

“I love my job, but I love my baby even more. When I told Facebook I wanted to work from home part-time, HR was firm: You can’t work from home, you can’t work part-time, and you can’t take extra unpaid leave…..Zuckerberg said he was sorry I was leaving.”

Most companies still operate a version of the same out-of-date policies. It’s time that they, and governments, began to wake up to the consequences. Common sense tells us that everyone would benefit from introducing more flexible working arrangements. And it is also the only way that we will get back to replacing our population, before it is too late.

“The only economic environment that almost all of us alive today have ever known, is a whopping great historical outlier….inflation has positively exploded during all of our lifetimes. And not just general price inflation – asset prices have surged too. What is this down to? Reid and his team conclude that at its root, this is down to rampant population growth.” (my emphasis)

As Stepek reports, the world’s population growth since 1950’s has been far more than phenomenal:

“From 5000BC, it took the global population 2,000 years to double; it took another 2,000 years for it to double again. There weren’t that many of us, and lots of us died very young, so it took a long time for the population to expand. Fast forward another few centuries, though, and it’s a different story.

“As a result of the Industrial Revolution, lifespans and survival rates improved – the population doubled again in the period between 1760-1900, for example. That’s just 140 years. Yet that pales compared to the growth we’ve seen in the 20th century. Between 1950-2000, a mere 50 years, the population more than doubled from 2.5bn to 6.1bn.”

“Vaccination against smallpox was almost certainly the critical factor in enabling the Industrial Revolution to take place. It created a virtuous circle, which is still with us today:

Increased life expectancy meant adults could learn from experience instead of dying at an early age

Even more importantly, they could pass on this experience to their children via education

Thus children stopped being seen as ’little adults’ whose role was to work as soon as they could walk

By 1900, the concept of ‘childhood’ was becoming widely accepted for the first time in history*

The last point is especially striking, as US sociologist Viviana Zelizer has shown in Pricing the Priceless Child: The Changing Social Value of Children. We take the concept of childhood for granted today, but even a century ago, New York insurance firms refused to pay death awards to the parents of non-working children, and argued that non-working children had no value.

Deutsche’s topic is inflation, and as Stepek notes, they also take issue with the narrative that says central banks have been responsible for taming this in recent years:

“The Deutsche team notes that inflation became less fierce from the 1980s. We all think of this as being the point at which Paul Volcker – the heroic Federal Reserve chairman – jacked up interest rates to kill off inflation. But you know what else happened in the 1980s?

“China rejoined the global economy, and added a huge quantity of people to the working age population. A bigger labour supply means cheaper workers. And this factor is now reversing. “The consequence of this is that labour will likely regain some pricing power in the years ahead as the supply of it now plateaus and then starts to slowly fall”.”

THE CENTRAL BANK DEBT BUBBLE IS THE MAIN RISK
The chart above from the New York Times confirms that that the good times are ending. Debt brings forward demand from the future. And since 2000 central banks have been bringing forward $tns of demand via their debt-based stimulus programmes. But they couldn’t “print babies” who would grow up to boost the economy.

Today, we just have the legacy of the debt left by the central banks’ failed experiment. In the US, this means that the Federal government is almost at the point where it will be spending more on interest payments than any other part of the budget – defence, education, Medicaid etc.

Relatively soon, as the Congressional Budget Office has warned, the US will face decisions on whether to default on the Highway Trust Fund (2020), the Social Security Disability Insurance Trust Fund (2025), Medicare Hospital Insurance Trust Fund (2026) and then Social Security itself (2031). If it decides to bail them out, then it will either have to make cuts elsewhere, or raise taxes, or default on the debt itself.

THE ENDGAME FOR THE DEBT BUBBLE IS NEARING – AND IT INVOLVES DEFAULT
Global interest rates are already rising as investors refocus on “return of capital”. Investors are becoming aware of the risk that many countries, including the USA, could decide to default – as I noted back in 2016 when quoting William White of the OECD, “World faces wave of epic debt defaults” – central bank veteran:

“It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something. The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians.”

The next recession is just round the corner, as President Reagan’s former adviser, Prof Martin Feldstein, warned last week. This will increase the temptation for Congress to effectively default by refusing to raise the debt ceiling. Ernest Hemingway’s The Sun also Rises probably therefore describes the end-game we have entered:

An amazing development is taking place in the world today. For the first time in human history, more people are joining the 55+ age group than the 25 – 54 age group:

600m people will be joining the New Old 55+ cohort between now and 2030, taking their numbers to 1.8bn

This is twice the number joining the Wealth Creator 25 – 54 cohort, which will total 3.3bn in 2030

It means there will have been a 6-fold increase in the New Old cohort versus the 190m in 1950

This has never happened before, for the simple reason that life expectancy has never been as high as it is today.

Someone aged 65 in the developed world has a life expectancy of 20 years today. Someone in the emerging economies can expect to live another 15 years. Yet just a century ago, TOTAL life expectancy was just 46 years in the developed world and only 24 years in the emerging economies.

This has critical implications for the global economy, and therefore for companies and investors. As I noted in the Financial Times last year:

“Consumption is 60% of Western GDP. And so a growing army of pensioners creates obvious headwinds for growth. They lack the income to stimulate demand themselves, while the spending power of the younger generation is reduced by the need to help pay for their parents’ pensions.

“It is wishful thinking to imagine that Europe’s demographic deficit, created by 50 years of declining birth rates and rising life expectancy, can now be resolved by negative interest rates or the electronic printing of banknotes.”

We are in a trap of our own making. Policymakers have been too scared to debate the implications of longer life expectancy with the electorate. Yet more than 1 in 5 of the world’s population will be in the lower-spending and lower-income New Old 55+ age group within 15 years. There were only 1 in 10 in the group just 15 years ago, in 2000.

The world’s previous demographic dividend, caused by the arrival of the BabyBoomers in the peak-spending and peak-income Wealth Creator 25-54 age group, is now becoming a demographic deficit. Yet pension age is still not properly indexed to life expectancy. Pension age today is lower than when pensions were first introduced a century ago.

We have long passed the point of no return in terms of the impact on demand patterns and economic growth. If women were suddenly to return to having the same number of babies as in 1950, it would still take 25 years for these babies to grow up and join the wealth creating cohort. Companies and investors simply must revisit their stratgegies to take account of how these changes will impact them.

Should it really matter that the US Federal Reserve might raise US interest rates by 0.25% tomorrow? Surely the IMF/World Bank should not need to argue that such a small increase could really be critical for the world economy?

The fact that such a debate has been taking place at all, highlights the damage done by stimulus policies to the US and global financial system, as the New York Times notes:

“The banking system is almost comically awash in money. In June 2008, banks had about $10.1bn in their Fed accounts. The total is now $2.6tn. Picture all of the money in June 2008 as a single brick; the Fed has added 256 bricks of the same size. On top of that first brick, there is now a stack five stories tall”.

The volatility created by the “will she/won’t she” debate over Fed Chair Janet Yellen’s intentions has already led to enormous uncertainty in currency and other markets. It has also confirmed the underlying fragility of the US and global economy. The Atlanta Fed’s GDP Now model is currently showing US Q3 GDP growth at just 1.5%.

As companies move into Budget season, they therefore need to focus their planning on mitigating the very real uncertainty about the outlook for 2016 – 2018. One excellent way of doing this would be to debate the Scenarios above, developed by the McKinsey consultancy:

Global synchronicity describes a world where most major economies tackle their structural challenges, and are able to exit from aggregate demand stimulus smoothly

Policymakers are virtually alone in choosing to ignore this common sense insight – as their presentations at the recent Jackson Hole, USA conference confirm. This, of course, is why their policies have failed to spark the economic recovery they first promised 6 years ago.

They assured us that the 2008 Crisis was just a liquidity crisis, and said the need was to use stimulus to unblock the financial plumbing system

But in fact it was a balance sheet crisis, where there was too much debt – as people hadn’t saved enough to fund their extended retirement

They also promised us that that lower interest rates would stimulate demand

But in fact, the average European and Japanese household is now headed by someone over 55, and the US is moving in that direction. Lower interest rates actually destroy demand amongst this age group who are more dependent on their savings for spending money

A 5% interest rate on an average $30k saving pot would give them $1500/year to spend, or $125/month. But instead today’s low interest rates mean they have to save more, and spend less, if they hope to have sufficient income to survive their likely 20 years of retirement

Policymakers’ theories about the economy were formed a long time ago, when the BabyBoom was well underway, and so essentially target the ‘average 40-something white male’ . This is why they have failed to work as promised.

They ignore the complete change that has taken place in populations since 1970, with increasing female participation in the labour force, and the growth of multi-culturalism. Biologists’ models of ‘competing populations’ would solve this problem overnight, if policymakers were prepared to look outside their own narrow field of academia.

This is why McKinsey’s Scenarios represent such a valuable contribution. As they note in another new paper:

“The world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion, and declining costs. Yet this unprecedented run may be coming to an end”

Today’s New Normal world means that the strong and constant growth seen in the BabyBoomer-led SuperCycle is unlikely to return. Thus McKinsey’s Scenario 1 is probably the most unlikely scenario of all to be realised. And all the others imply major change is underway – whatever interest rates moves the Fed makes tomorrow.

“Central banks have created a debt-fuelled ‘Ring of Fire’, and we will no doubt have felt many tremors (large and small) as a result, by the time my next 6-monthly update appears in September“.

That was my forecast for world stock markets back in March, and I imagine few would argue with it today, as we review developments since then. Central banks have spent almost $25tn since the Crisis began in 2008 in the belief they could kick-start global recovery by boosting asset markets, particularly stock markets. As then US Federal Reserve chairman Ben Bernanke explained in November 2010:

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

Today, 5 years later, it is hard to see why the policy was adopted. It was meant to be a temporary support, whilst economies recovered. But instead it has become semi-permanent, with the world’s major financial organisations now warning against even a 0.25% US interest rate rise next week:

The UK is down 8% as its London housing bubble starts to burst as foreign buyers rush for the exits

The other 3 BRICs were supposed to lead the world out of recession – but Brazil is down 37%, China down 48% and Russia down 68%

Today’s globally ageing populations and falling fertility rate are inevitably having a major impact on the economy. But unfortunately, politicians have wanted to believe that printing money would somehow change the fact that the BabyBoomer-led demographic dividend has now become the demographic deficit of the future.

Financial market developments over the past 6 months are warning us that we will all pay a heavy price if this wishful thinking continues to dominate economic policy.

My new post for the Financial Times FT Data blog discusses how the ageing of the US population is creating major headwinds for the economy.

Guest post by Paul Hodges| May 06 13:45 |

Demographic change is creating major headwinds for the US economy, as confirmed by its disappointing first quarter GDP growth of 0.2 per cent. Consumption accounts for around 70 per cent of US GDP, and new data on household spending from the US Bureau of Labor Statistics (BLS) demonstrate how the ageing of the US population is creating major structural change in the economy. One key factor is that there are more older people than ever before, due to a combination of the ageing of the US baby boomer generation (those born between 1946 and 1964) and increasing life expectancy.

Older people tend to spend less, as they already own most of what they need and their incomes decline as they enter retirement. Equally important is the collapse that has occurred in US fertility rates since the peak of the baby boom. These have nearly halved from the 3.33 babies/woman level of the mid-1950s to just 1.97 babies/woman today, below the level required to replace the population. As a result, the size of the 25-54 age group, historically the main wealth creators, has plateaued in the US.

The above chart highlights how these two developments have impacted spending patterns between 2000 and 2014:

In 2000, there were 65m households headed by someone in the wealth creator (25-54) cohort, almost double the 36m in the 55+ cohort

But from 2001, the boomers began to move into the 55+ cohort, causing its numbers to rise by more than a third, to 52m by 2014. Meanwhile, the wealth creator cohort plateaued at 66m.

These trends are likely to continue. There are few signs of any increase in fertility rates, while the average 65-year old American baby boomer can now expect to live for another 20 years

These trends have clear implications for the US economy, as this chart confirms:

Consumption peaks in the 45 to 54 age-group, where the average spend was $63k in 2014

35 to 44 year-olds were close behind, with annual spending of $60k, while 25 to 34 year-olds spent $48k

By comparison, 55 to 64 year-olds spent $56k, and those aged over 65 spent just $43k

The only major area of spending that increases after 55 is healthcare, which rose from $4783 in the 45 – 54 age group to $6001 for the over-65s

One positive factor is that spending by older Americans increased between 2000 and 2014 in real terms (at 2014 prices) from $43k to $48k, as the first chart shows. But this was still a 15 per cent reduction against the $57k spent by the wealth creators. On the negative side, spending by the wealth creators declined by 5 per cent over the same period from $60k to $57k.

The BLS data highlights how baby boomers’ spending when they were in the wealth creator cohort created a demographic dividend for the US economy. But now, the ageing of the boomers and the collapse of fertility rates is steadily turning that dividend into a demographic deficit.

Of course, this is only bad news from the perspective of economic growth. Most Americans are highly delighted at having gained an extra 10 years of life expectancy since 1950. Their main worry instead, given today’s low interest rates, is how to finance their extended retirement.

Paul Hodges is the co-author of Boom, Gloom and the New Normal: How the Western Baby Boomers are Changing Demand Patterns, Again. www.new-normal.com